Sunday, May 31, 2009

Will Higher Education Be the Next Bubble to Burst? -

Will Higher Education Be the Next Bubble to Burst? -
"Is it possible that higher education might be the next bubble to burst? Some early warnings suggest that it could be.

....According to the National Center for Public Policy and Higher Education, over the past 25 years, average college tuition and fees have risen by 440 percent — more than four times the rate of inflation and almost twice the rate of medical care."
What can be done?
"What can they do to keep the bubble from bursting? They can look for more efficiency and other sources of tuition.....recently argued for the year-round university, noting that the two-semester format now in vogue places students in classrooms barely 60 percent of the year,....Colleges can also make productivity gains by using technology and re-engineering courses. For the past 10 years, the National Center for Academic Transformation, supported by the Pew Charitable Trusts, has helped major universities use technology to cut instructional costs by an average of 40 percent while reducing the number of large course sections, graduate teaching assistants, and faculty time on correcting quizzes."

Free & Easy Access to worldwide Broadcasts on Economics, Social Security, Policy and Strategy

THE FREEDOM NETWORK AUDIO PORTAL - Free & Easy Access to worldwide Broadcasts on Economics, Social Security, Policy and Strategy:
"Podcasts on Economics, Social Security, Strategy, Liberty & Public Policy"

Wow. Amazing stuff. Thanks to Wayne Marr for point it out.

Friday, May 29, 2009

Data mining--or past performance is no guarantee of future performance

Calendar and other similar anomalies are generally very interesting and students love reading about them (well as much as they love reading anything in finance) but do not fit well with efficient markets.

For instance, why? Consider the January effect If stocks were predictably up in January and investors had calendars that showed December was the month before January, investors would buy in December. etc etc.

The following article form CNN addresses this and other anomalies.

Selling stocks in summer often isn't a smart thing to do - May. 29, 2009:
"Wall Street traders have a lot of funny ways to try and predict stock performance.

There's the hemline indicator, which tries to equate fashion trends to stocks. According to that maxim, the shorter women's skirts are, the better stocks should do. It's also known as the bull market, bare knees phenomenon. Classy.

Then there's the Super Bowl indicator. Stocks are supposed to go up in a year when an 'old' NFL team wins"

Short term run up in IPOs...anecdotal evidence fits historical

In class we teach that IPOs are very risky and have historically been underpriced in short run and then overshoot their value and are overpriced in longer run. (see Ritter's work on this)

The standard academic explanation for this is that with a float lower than shares outstanding the stock is very difficult to be shorted (See Bradley and Jordan 2002) and there are no options for a period so little way for those who believe the stock is overpriced to act on this mispricing.

While I have taught that many times and truly do believe it to be correct, I am always a bit concerned when academics meet practitioners. So I was very happy to hear that they agree.

From Research 2.0 Who is eating at the OpenTable?:
"We just published a research snapshot on OpenTable (OPEN - $28.75) which includes our typical intrinsic valuation analysis as well as a view of the company. Unfortunately for current investors the company is worth about 65% less than it’s currently trading at in the market.

This is explained in good part to the fact that you can’t short the stock and there are no options as yet since they just came public. But all this does is delay the inevitable decline to much lower prices before new long-term investors can buy shares."

Thursday, May 28, 2009

G.M. Reaches a Deal With Bondholder Committee - DealBook Blog -

WOW! GM Bondholders reached a deal! SHOCKED.

They get 10% plus warrants to buy more shares.

G.M. Reaches a Deal With Bondholder Committee - DealBook Blog -
"General Motors said in a regulatory filing on Thursday that it has proposed a new deal to a committee representing many of its largest bondholders, offering up to a 25 percent stake in exchange for not opposing G.M.’s reorganization plan"

Mixed results on the Microfinance front

Contrary to the attention grabbing headline, the Jury is still out on microfinance. Here is at least some evidence that it does not do all that we hope. That said, the conclusion is definitely more controversial.

The verdict is in on microfinance - PSD Blog - The World Bank Group:
"The results from the first large-scale randomized trial of access to microfinance indicate that it comes up short in many areas of human development. 52 of 104 slums in Hyderabad were randomly selected to receive new branches of a microfinance outfit called Spandana. Abhijit Banerjee and the other randomistas from the Poverty Action Lab describe the results in The Miracle of Microfinance? Evidence from a Randomized Evaluation:

...microcredit does have important effects on business outcomes and the composition of household expenditure. Moreover, these effects differ for different households, in a way consistent with the fact that a household wishing to start a new business must pay a fixed cost to do so. Existing business owners appear to use microcredit to expand their businesses....

[BUT] ... it appears to have no discernible effect on education, health, or womens' empowerment. Of course, after a longer time, when the investment impacts (may) have translated into higher total expenditure for more households, it is possible that impacts on education, health, or womens' empowerment would emerge. However, at least in the short-term (within 15-18 months), microcredit does not appear to be a recipe for changing education, health, or womens' decision-making.:"

The headline aside, the authors correctly point out that 15-18 months is a short a time period to measure dramatic changes. That the loans help the business (which in the longer term would be predicted to positively impact education, wealth, health, and MAYBE women's equality issues), is enough for me to remain skeptical of any article saying the verdict is in.

BTW I included this for completeness and to overcome any bias I have in its favor ;) In my limited personal experience, microloans have worked VERY well. True my experience is limited (I won't count Kiva even thouh that has been positive too!), but locally the loans served their purpose (the borrowers had no access to credit) and the borrowers have made every payment to date.

So, I guess more research is needed to determine what about microfinance works (or under what conditions), and when it does not.

PS read the comments on this one.

Pet Millionaires: Seven Cats and Dogs Who Are Actually Richer than You — Bankling

Pet Millionaires: Seven Cats and Dogs Who Are Actually Richer than You — Bankling:
"We hear about millionaires — and billionaires — quite frequently. But less often do we hear about pet millionaires. They do, however, exist. Since 1923, when the first reported case of a pet inheritance was affirmed in Willett vs. Willett, pets have been receiving money. Sometimes quite a lot of money. Here are seven dogs and seven cats (in particular order) that are probably richer than you...."

Thanks to Wayne Marr for pointing this one out.

Wednesday, May 27, 2009

Work-Life Balance Is Especially Difficult in Finance -

What do you think?

Economic Scene - Work-Life Balance Is Especially Difficult in Finance -
"Among elite white-collar fields, finance appears to be uniquely difficult for anyone trying to combine work and family.

Finance, on this score, is worse than law and worse than academia. It is far worse than medicine, which emerges from the research as the highly paid profession with the most flexibility. Near finance at the bottom of the list is consulting, another field that became more popular in the last two decades.

The research, by Claudia Goldin and Lawrence Katz of Harvard....
and later
"Ms. Goldin and Mr. Katz, who are two of the country’s leading labor economists and have published the crux of these findings in the American Economic Review, studied Harvard graduates from the last 40 years....had the disadvantage of creating a decidedly atypical survey group. So the two economists compared their results to two other surveys...and found broadly consistent patterns"
Mmm...I tend to agree in for those working on Wall Street (which for some reason just seems to eat up people's time making work an "all-day, every day" thing), but elsewhere?

More difficult to say but will say that I remember taking the double deck tour in Barcelona on a hot day last July and fairly late in the day as the tour was wrapping up I do remember thinking that the only people still working and not dressed for the weather were in the "Financial District" so maybe it is an industry specific phenomenon.

Sometimes we can't see the forest for the trees

Part Behavioral finance, part cycling, and part a study in how the brain works, the following "Test" is eye opening at least.

We all get so caught up in seeing what we want to see that we sometimes miss the obvious. This effects us in many ways: In finance, if bullish (optimistic), we are more apt to see the good news, if bearish (pessimistic) you see only bad news.

That is one reason why big break throughs happen from those outside the field. It is one reason why sabbaticals and vacations are important. But it can also have important implications in many other ways.

Go ahead, take the test. It takes about a minute.

Cross posted on's blog, Olean Cycling club's blog (which is currently almost inactive :( ), and RandomTopics2.

thanks to the Tour of the Gila for pointing this one out.

Tuesday, May 26, 2009

Your Money - Advice for Graduates From a Texas Tech Money Major -

The NY Times did a timely piece for graduates. Interestingly, they had a graduate help write the article.

Your Money - Advice for Graduates From a Texas Tech Money Major -

Some highlights:

"I spent hours picking the brain of Madison Nipp, who graduated earlier this month with the highest grade point average of anyone in the major. "

"...Deena B. Katz, an associate professor in the Texas Tech program, said it made sense to her. “Women have better communication skills." "
Wait, whether it is true or not, how can she say that and Laurence Summers..., oh never mind.

Katz again:
"And financial planning is about people more than portfolios.”""

Definitely! Gee, she does have good communication skills.

Other tidbits:

* Credit cards can help get a credit history. So get a card, use it, just don't abuse it.
* Home ownership comes with costs
* Take full advantage of any tax advantaged saving plans. (ESP if company matches at any percentage!)

Good advice!

BTW after the article was this paragraph which might be useful to many of you:
"Ms. Nipp will answer questions next week on Joining her there will be the authors of the two best books on money for young people that I have ever read: Ramit Sethi, the author of “I Will Teach You to Be Rich,” and Beth Kobliner, who recently updated her 1990s classic “Get a Financial Life.” If you’re a recent college graduate, or simply a parent or relative who’s worried sick about one, please send questions for the trio to and let us know if we can use your name and hometown."

US Bancorp CEO Explains Banking | Simoleon Sense

Ok, yes I know this was pre-Lehman, and even pre-Bear! That said, it is an excellent starting point to understand banking. (If I were currently teaching a Money and Banking class I guarantee it would be required and tested).

Richard Davis (the CEO) speaks on the banking industry as well as his own firm.

US Bancorp CEO Explains Banking | Simoleon Sense:
"This video was posted at the noisefree investing blog. Great find.

Introduction (Via Noisefree Investing)

In this hour long video, Davis -one of the few banking CEO’s to remain largely unscathed in the recent financial mess- gives a great overview of the banking system. Davis is the CEO at US Bancorp."

While many might question the term unscathed (stock price fell by over 70% at trough), it is true they seemingly came through it alive. And yes, it should be noted that US Bancorp did get TARP money and is currently in plans to issue new equity.

A great class project would be to look at the firm and see what happened to it over the past 18 months realizing its exposure to the California housing market. (Hint: use Google lab's TimeLine (which wont allow me to link to it, but is very good and could easily be used to make a fascinating class discussion)

Friday, May 22, 2009

Wall St. Pay Overhaul Is Coming, Geithner Says - DealBook Blog -

Well it could be worse. Geithner gave a long interview (watch it if you can) with Bloomberg. Some highlights from Bloomberg and the NY Times:

From Bloomberg:
"The administration’s pay plan would be part of a proposed comprehensive overhaul of financial regulation aimed at both protecting consumers and reducing vulnerability to crises. Geithner has previously ruled out setting specific caps on pay and declined to alter existing compensation contracts.

In a wide-ranging interview, the Treasury chief declined to say whether the administration would propose stripping the Securities and Exchange Commission of some of its powers as part of the plan and dismissed suggestions of a rift with Federal Deposit Insurance Corp. ....

...shied away from declaring the financial crisis over, saying that credit is still tight and interest rates are still high for many business borrowers. He forecast that would improve gradually as companies and consumers reduced their debt levels to more financially manageable levels."

From the NY Times: Wall St. Pay Overhaul Is Coming, Geithner Says - DealBook Blog -

"...according to Treasury Secretary Timothy F. Geithner, who told Bloomberg Televison that the proposed overhaul should be announced “within weeks.” In a portion of the interview made available Friday on Bloomberg’s Web site, Mr. Geithner said to expect a “very, very substantial change.”

How substantial? Well, Mr. Geithner has already come out as opposing outright pay caps, saying there are better ways to fix a compensation system that fueled big, dangerous bets.

He seems to favor shareholder votes on executive compensation, known as say-on-pay provisions, which were a condition for banks that were part of the Troubled Asset Relief Program. Such votes are nonbinding, but can send a strong message."

Catching up Newsletter style

Catching up with some articles I had saved on Desktop...

Bloomberg (with the help of NYU's Thomas Pilippon has an interesting article on how lost Wall Street jobs impact "Main Street".
"The biggest Wall Street crisis since the Great Depression isn’t just a setback for New York or bankers. The finance industry’s contraction may wipe out $185 billion in wages and profits, or $600 for every man, woman and child in the U.S., according to Thomas Philippon, a finance professor at New York University’s Stern School of Business. The trail of reduced income affects car mechanics, waiters, sports teams, hair stylists, jewelers, housecleaners and watch repair shops."

The WSJ reported recently on Jim Cramer. Or more specifically on another study of Cramers' performance this one by Bolster and Trahan. As with other studies, the gist is that he does not outperform.
"“If we adjust for his market risk, we come up with an excess return that is essentially zero,” Bolster said, adding that “zero,” in this case, means his returns are roughly in line with the risk he’s taking on. “He’s pulling his own weight with respect to the risks that his picks represent,” Bolster said. In the paper, Bolster and fellow finance professor Trahan conclude that “we find inconsistent evidence of Cramer’s ability to add value through security selection.”"
WhiteCollarFraud (I am not kidding, that is the name of the blog, and it is by a convicted felon (and former CPA ) no less!) reports on the uh, irregular accounting practices at I won't go into the details (essentially accounting irregularties that even introductory accounting students would probably pick up on), but found that earnings management and changing of audit firms interesting.

SSRN-Green Jobs Myths by Andrew Morriss, William Bogart, Andrew Dorchak, Roger Meiners:
"Myth: Green jobs promote employment growth.

Reality: By promoting more jobs instead of more productivity, the green jobs described in the literature encourage low-paying jobs in less desirable conditions. Economic growth cannot be ordered by Congress or by the United Nations. Government interference - such as restricting successful technologies in favor of speculative technologies favored by special interests - will generate stagnation.

Myth: The world economy can be remade by reducing trade and relying on local production and reduced consumption without dramatically decreasing our standard of living.

Reality: History shows that nations cannot produce everything their citizens need or desire. People and firms have talents that allow specialization that make goods and services ever more efficient and lower-cost, thereby enriching society.

Myth: Government mandates are a substitute for free markets.

Reality: Companies react more swiftly and efficiently to the demands of their customers and markets, than to cumbersome government mandates."

A scary article from Why scary? Because it reminds we that there are people out there who think like this.
"...hedge funds, in my opinion, haven't received nearly as much blame as they deserve, both for helping to trigger the financial crisis and, subsequently, for making it much worse than it might otherwise have been.

As we all know now, derivatives were a root cause of the mortgage crisis that led to the housing and financial-system collapse. Wall Street's financial whizzes assembled these esoteric securities from slices of subprime mortgages, and investment bankers then sold them all over the world, often to clueless buyers. Much of the demand for what Warren Buffett years ago termed "financial weapons of mass destruction" came from hedge funds.
Scary, and DANGEROUS stuff indeed. Not hedge funds, the article. Should we disallow risk taking? Entrepreneurship in general? Where do we stop?

Britain Warned On Credit Rating -

Uh, oh...Might we need to redefine the risk free rate?

As we have seen for months now, the threat of a US downgrade is no longer trivial. Months ago Chinese officials expressed their concern and it such speculation is common fare both online and in newspapers.

Now the strongest signal yet that sovereign debt (even of the US and UK) really is no longer default risk free:

Britain Warned On Credit Rating -
"A leading credit rating agency cut its outlook for Britain yesterday, moving the country a step closer to a downgrade and highlighting the vulnerability of the United States' own top-notch rating.

In cutting its outlook for Britain's sovereign rating from stable to negative for the first time, Standard & Poor's cited debt levels approaching the size of the nation's gross domestic product. While S&P reaffirmed Britain's actual long-term credit rating at AAA, its statement was effectively a warning about massive government spending."

BTW not that anyone asked my opinion, but I still think monetization is much more likely than default

Wednesday, May 20, 2009

I had a complaint that I think I should address

I subscribe to the view that if one person is saying it, many others are thinking it, so I will share my response.

I received an email recently that questioned why no one is making a bigger issue of the fact that much of the money paid in the so-called Wall Street Bailouts were just to make other bankers better off. The email also criticized my use of non academic publications (NPR and 60 Minutes in particular).

My response (only slightly edited):

"point taken...

I do not necessarily agree with the bailouts (and strongly disagree with them on philosophical grounds), but I can understand why they are being paid.

Are they worse than the alternative? I honestly do not know. While I still think I would let some banks fail and others suffer, this would come with harsh economic consequences of job losses and crushed dreams for millions.

The current strategy may come with similarly harsh consequences (setting a bad precedent, inflation, over regulation as a knee jerk reaction are three that come to mind instantly) as well, but these consequences are not assured. Thus, at least from that perspective (trading a sure bad for a possible bad) I confess I would be tempted to do the bailouts.

Would I? I am not sure. I would like to think I would not since it sets such a bad precedent. But if push came to shove, I might very well take Bernanke's path.

Why do I say that? Because I have in the past given extra credit assignments, graded on curves, and done similar things in the classroom that are not totally unlike a bailout.

I am glad you disagree and it makes me think that much more about my positions.

That said, I think the 60 Minutes piece and the NPR piece have their merits. Are they "hard hitting"? No. But do they bring information that we have not been exposed to in other ways? Yes. Therefore, I stand by their inclusion from time to time. "

So while I am sorry for not being strongly one side on this one, it is a tough tough situation, and after many many hours of thought over these last nine plus months (say from Lehman on), I still am not convinced one side is totally right or totally wrong.

James Surowiecki on the boom and on banks

James Surowiecki (yes he of Wisdom of Crowds Fame) wrote recently in the New Yorker on why regulators and politicians must realize that the small banks of the post war era (think George Bailey) will not be coming back.

Monsters, Inc.: Financial Page: The New Yorker:
"The desire to bring back the boring, small banking industry of the nineteen-fifties is understandable. Unfortunately, the only way to do that would be to bring back the economy of the fifties, too. Banking was boring then because the economy was boring. The financial sector’s most important job is channeling money from investors to businesses that need capital for worthwhile investment. But in the postwar era there wasn’t much need for this. The economy, while remarkably strong, was dominated by huge companies that faced little competition, and could finance investments out of their profits. And entrepreneurship was restrained: there were many fewer start-ups then than in the period after 1980. So the financial sector didn’t have much to do.

Two things changed this. First, in the seventies those huge companies started tottering, while the U.S. economy fell apart. Second, the corporate world was transformed by revolutionary developments in information technology and by the emergence of new industries like cable television, wireless, and biotechnology."

Interestingly in the same article Surowiecki writes about bubbles. And in particular that this one was unlike others since not only was there no real real (I love using the word real twice in a row) economy shift that led to it, but also (at least in his prediction) nothing good is coming out of this either.

"There have been three big banking booms in modern U.S. history. The first began in the late nineteenth century, during the Second Industrial Revolution, when bankers like J. P. Morgan funded the creation of industrial giants like U.S. Steel and International Harvester. The second wave came in the twenties, as electrification transformed manufacturing, and the modern consumer economy took hold. The third wave accompanied the information-technology revolution....In all these cases, it wasn’t so much that the bankers had changed; the world had.

The same can’t be said, though, of the boom of the past decade. The housing bubble was unique, and uniquely awful. Each of the previous waves had come in response to a profound shift in the real economy. With the housing bubble, by contrast, there was no meaningful development in the real economy that could explain why homes were suddenly so much more attractive or valuable. The only thing that had changed, really, was that banks were flinging cheap money at would-be homeowners, essentially conjuring up profits out of nowhere."

Surowiecki sure can write!

HT to SeekingAlpha for pointing this one out

Tuesday, May 19, 2009

Why AIG Stumbled, And Taxpayers Now Own It - CBS News

From 60 Minutes.

Why AIG Stumbled, And Taxpayers Now Own It - CBS News: "(CBS) Of all the corporate bailouts that have taken place over the past year, none has proved more costly or contentious than the rescue of American International Group (AIG). Its reckless bets on subprime mortgages threatened to bring down Wall Street and the world economy last fall until the U.S Treasury and the Federal Reserve stepped in to save it.

So far, the huge insurance and financial services conglomerate has been given or promised $180 billion in loans, investments, financial injections and guarantees - a sum greater than the annual cost of the wars in Iraq and Afghanistan."

Bonds outperforming stocks over the last 40 years? WOW!

"You are never as good as you think in a winning streak nor as bad as you think in a losing streak."

The other night I was listening to a Mets-Giants game on the radio and the announcer reminded us of the above quote and attributed it to Bobby Valentine (former Mets' manager). I have no doubt that Bobby V did say it, but I am also willing to bet it has been said millions of times over the years by coaches in all sports and said to teams from Little League also-rans to world champions.

But somehow, the word did not get to those who now claim that Bonds outperform Stocks in the long run.

I won't argue with the math. I will argue with the timing. The measurement comes at a time following a bear market (losing streak) in equities and a bull market (winning streak) in bonds.

Now that said, 90% of all sports articles seem to be written like this and it makes them no less interesting, so long as you keep in mind Valentine's sage warning, I strongly urge you to read the article as it is very thought-provoking.

Stocks Losing the Long Run to Bonds -

"Two brutal bear-markets for stocks within a decade and a stunning bull run for government bonds is challenging the gospel that stocks will always beat bonds if investors just hold on long enough.

Now, Rob Arnott, a veteran financial analyst and market pundit, has lobbed the academic version of a Molotov cocktail at one of the most sacred tenets of investing....

'For the long-term investor, stocks are supposed to add 5% a year over bonds. They don't,' Arnott, founder of investment consultants Research Affiliates and former editor of the Financial Analysts Journal, wrote in a paper published in the latest Journal of Indexes.

'Indeed,' Arnott contended, 'for 10 years, 20 years, even 40 years, ordinary long-term Treasury bonds have outpaced the broad stock market.'
and later:
"Through the end of April, the 10-year annualized return on the S&P 500 was negative 2.5%, according to Standard & Poor's.

Meanwhile, an index fund tracking long-term U.S. Treasury bonds, Vanguard Long-Term Treasury Fund, gained 7.2% annualized over the same period.

"People fret about our 'lost decade' for stocks, with good reason, but they underestimate the carnage," Arnott wrote.

Arnott's research shows that starting at any point from 1979 through the end of 2008, an investor in 20-year Treasurys who continually rolled over into the nearest bond and reinvested the income would have come out ahead of the S&P 500."

So while it is always good to question what we "know" and to think about it from the perspective of what if we are wrong, these findings likely are driven by timing. If I were making a long-term bet I still believe that stocks will outperform, but maybe will remember that such an expectation does not mean it will always be that way.

Indeed, sometimes the Pirates have a better record than the Mets, but I am still willing to bet that over a longer haul, the Mets (and equities) will come out ahead.

Monday, May 18, 2009

Questions for Myron Scholes - Crash Course - Interview -

Myron Scholes does not deserve the blame for the economic crisis but as a big name he seemingly is always in the cross fire. This time is no different as he is interviewed by Deborah Solomon of the NY Times.

Questions for Myron Scholes - Crash Course - Interview -

An excerpt:
"The writer Nassim Nicholas Taleb contends that instead of giving advice on managing risk, you “should be in a retirement home doing sudoku.”

If someone says to you, “Go to an old-folks’ home,” that’s kind of ridiculous, because a lot of old people are doing terrific things for society. I never tried sudoku. Maybe he spends his time doing sudoku.

Some economists believe that mathematical models like yours lulled banks into a false sense of security, and I am wondering if you have revised your ideas as a consequence.

I haven’t changed my ideas. A bank needs models to measure risk. The problem, however, is that any one bank can measure its risk, but it also has to know what the risk taken by other banks in the system happens to be at any particular moment."

I won't add much since I really think the idea of blaming him is just silly, but one piece of advice for Myron, try soduko some time. It really is a pretty fun game. I bet I have not played it in a year or more, but I do like it.

Sunday, May 17, 2009

Financial literacy quiz | | Asbury Park Press

Pretty good finance quiz that focuses on personal finance.

Financial literacy quiz | | Asbury Park Press:

"Are you up to taking a short quiz to test your knowledge of some key aspects of family financial management? Give it try and see how you do. (Answers at bottom):"

Saturday, May 16, 2009


This just raised the bar. A WOW on all levels.

As for finance, the bar has been raised for all stock reports etc. Typing in one word (Name of stock) and you have the basis for an entire presentation.

Here is APPLE's : Wolfram|Alpha

Indeed it is better done than some I saw this year in class! Google, you could be in trouble.

Friday, May 15, 2009

Insider Trading Discovered Inside The SEC

YIKES!!! With the normal apologies to Dr. Seuss, who is monitoring the monitors?
From Clusterstock:
Insider Trading Discovered Inside The SEC: "The SEC isn't great at identifying most kinds of fraud, but they've always had a knack for identifying high-profile insider trading cases.

Maybe because they're intimitely familiar with it?

Bloomberg: U.S. prosecutors and the FBI are investigating whether two Securities and Exchange Commission lawyers illegally used nonpublic information from the agency to bet on stocks, SEC Inspector General David Kotz said in a report."

Our Vanishing Home Equity

Debt makes good times, great; and bad times, horrible. So equity values in homes have fallen much further than the underlying real estate prices. So far in fact that if this chart is to be believed, we are underwater!

CHART OF THE DAY: Our Vanishing Home Equity:(from Clusterstock)
"Everyone knows that U.S. house prices have fallen almost 30% from the peak. What is less well known is that Americans' equity in those houses--the part that American homeowners actually own--has fallen much further. Why? Because, despite all the foreclosures and write-offs, our total mortgage debt has only dropped slightly from its peak.

When value falls and debt stays the same, equity gets crushed"

Yet another Astana Update: Astana changes jersey over money row - VeloNews

Still more on Astana. ANd Livestrong has stated there is a major announcement soon. Stay Tuned.

Astana changes jersey over money row - VeloNews:
"The sun hasn’t set on Astana yet, but the glow of the team’s sponsors has certainly dimmed.

Following a long-running row over the non-payment of the team’s wages, eight of nine riders on the Kazakhstan-sponsored squad started the Giro d’Italia’s seventh stage Friday wearing race jerseys and shorts Friday with the names of the team’s major sponsors virtually faded out.

Astana manager Johan Bruyneel said the protest is the team’s way of demonstrating its frustration that Kazakh sponsors are not fulfilling its contract obligations to the team."

Update on Astana from Johan Bruyneel

Here is an update from Johan Bruyneel himself on what is going on with Astana

:: Johan Bruyneel:::
"Since the beginning of the year, our team has had to deal with delays in payment from Kazakhstan. Up till now the situation is that the Kazakh Cycling Federation (KCF) has only paid two months of salary to the management company that runs the team. The only explanation we get from Kazakhstan is that the sponsors aren’t paying because of the economic crisis. They say they are trying to find a solution, but for me it is unclear which action they will take."
Here was the original story.

Thursday, May 14, 2009

GM says Chrysler-like deal best bankruptcy option | Reuters

GM says Chrysler-like deal best bankruptcy option | Reuters:
"General Motors Corp (GM.N) on Thursday said that if it files for bankruptcy it would most likely pursue a quick sale of its best assets to a new operating company similar to the process now reshaping Chrysler LLC.

The disclosure, which came in a filing for U.S. securities regulators, marked the first time that GM said it would most likely pursue the same legal strategy that Chrysler is using under federal oversight to slash its debt and dealerships."

It's about time. At least last year (Fall Semester) my MBA students had come to the same conclusion.

From NPR: Financial Time's Gillian Tett on JP Morgan and Derivatives

I listened to this on the radio tonight. It was so good, that the very first chance I had to blog it, I did. Good stuff!

Fresh Air from WHYY : NPR:
"Journalist Gillian Tett warned about the problems in the financial industry long before many of her colleagues. In her new book, Fool's Gold, Tett examines the role J.P. Morgan played in creating and marketing risky and complex financial products"
The author is from FT fame and FT has two extracts from the book.
"The first sign that there might be a structural problem with the innovative bundles of credit derivatives that bankers at JP Morgan had dreamed up emerged in the second half of 1998. In the preceding months, Blythe Masters and Bill Demchak – key members of JP Morgan’s credit derivatives team – had been pestering financial regulators. They believed that by using the new credit derivative products they had helped create, JP Morgan could better manage the risks in its portfolio of loans to companies, and thereby reduce the amount of capital it needed to put aside to cover possible defaults. The question was by how much. (Though these bundles of credit derivatives later went under other names, such as collateralised debt obligations [CDOs], at that time these pioneering structures were known as “Bistro” deals, short for Broad Index Secured Trust Offering). Masters and Demchak had done the first couple of Bistro deals on behalf of their own bank without knowing the answer to their question for sure. But when they were doing these deals for other banks, the question of reserve capital became more important – the others were mainly interested in cutting their reserve requirements."

Golden coffins: 10 of the most egregious CEO perks - MarketWatch

Agency cost problems or not? You decide.

Golden coffins: 10 of the most egregious CEO perks - MarketWatch:
"Use of company jets, cars and drivers, free home security, free financial planning advice and country club memberships. Some of these perquisites, or perks, keep coming after retirement. Even in death, the money keeps flowing in the form of so-called golden coffins.

In the midst of the worst global financial crisis since the Great Depression, public anger against executive compensation and benefits has reached f4er5ever pitch, so some perks may be on the way out.....
and on page 2...
"Occidental Petroleum provided Chief Executive Ray Irani with $403,285 in tax preparation and financial planning services in 2008. That's nearly eight times the median U.S. household income and more than the $400,000 salary of the President of the United States, according to the AFL-CIO, a union group."

SEC Proposes New Money Managers Rules After Madoff Ponzi Scheme -

SEC Proposes New Money Managers Rules After Madoff Ponzi Scheme -
"The U.S. Securities and Exchange Commission moved to impose new rules on money managers to safeguard client holdings after Bernard Madoff’s $65 billion fraud shattered investor confidence.

SEC commissioners voted 5-0 today on a proposal that would subject investment advisers holding customer assets to surprise inspections by independent auditors. Some money managers would also face compliance audits to ensure they are adhering to securities laws."

Video: The Fat Tail----part Economics,part Finance, part politics

YouTube - The Fat Tail-- Part Economics, part finance, part politics but totally interesting.

While it is probably more politics than a normal post, it has much finance as well. And one of the main themes is that politics are taking over finance and economics.
"In a new groundbreaking book The Fat Tail, Ian Bremmer and his co-author Preston Keat, two of the world's leading figures in political risk management, identify the wide range of political risks that global firms face - risks that stem from great power rivalries, terrorist groups, government takeover of private property, weak leaders and internal strife, and even the "black swans" that defy prediction.

These scenarios - and their catastrophic effects on business - happen much more frequently than we imagine"

Paulson Told Bankers to Take U.S. Taxpayer Aid or Be ‘Exposed’ -

Paulson Told Bankers to Take U.S. Taxpayer Aid or Be ‘Exposed’ -
"Former Treasury Secretary Henry Paulson, saying nine U.S. banks were “central to any solution” of the credit crisis, told their leaders to take government aid or be forced to by regulators, according to a memo prepared for an October meeting.

“If a capital infusion is not appealing, you should be aware that your regulator will require it in any circumstance,” Paulson’s one-page list of talking points for the session with the banks’ chief executives said. “We don’t believe it is tenable to opt out because doing so would leave you vulnerable and exposed.”"

Tuesday, May 12, 2009

Fast Look around

In the midst of finals, so very little time, but I did think these posts were interesting:» Blog Archive » Another $3 million for Martha Stewart…:
"Martha’s new employment contract in the 10-Q filed by the company yesterday, which includes a $3 million “retention payment” for the domestic goddess. That’s in addition to a $2 million salary, which according to the proxy the company filed last month, represents a $1.1 million raise. The contract also includes a wide range of other goodies, including “automobiles and drivers seven days a week”, reimbursement for all business, travel and entertainment expenses (which seems like a pretty broad definition), security expenses and even internet and telephone expenses at her various homes."
Insider selling at GM drives price down further:
"Retiring Vice Chairman Bob Lutz sold 81,360 shares at $1.61 each, for proceeds of $130,990. Vice Chairman Thomas Stephens and Group Vice Presidents Carl-Peter Forster, Ralph Szygenda, Gary Cowger and Troy Clarke sold smaller amounts, at prices ranging from $1.45 to $1.61. The total number of shares sold was 205,000."

Real Estate still falling. From CNN: Record Home Price Slide
"The steep slide in home price accelerated at a record pace during the first three months of 2009, according to an industry report issued Tuesday.

The national median home price of single family homes sold during the first quarter fell 13.8% to $169,000 year over year, and 6.2% compared with the last quarter 2008, according to the National Association of Realtors (NAR). That was the largest year-over-year decline in the 30-year history of the report."

Monday, May 11, 2009

Zvi Bodie on PBS

Zvi Bodie has been on PBS quite a bit of late:

Pocket Change: Answers to Your Finance Questions | Online NewsHour | May 5, 2009 | PBS: "In the first installment of Pocket Change, a regular forum on personal finance, NewsHour economics correspondent Paul Solman and finance professor Zvi Bodie tackle viewers' questions on credit unions, credit scores, and whether gold makes a good investment."

and then a discussion of Savings and Investing from the PBS FinanceFallacy series:
"ZVI BODIE: It's what's left over after you consume your income. How you invest it is about, you know, how much of it goes into a savings account, how much of it goes under a mattress, how much of it goes into stocks and other risky assets. So, investing in and of itself is not taking risk. You can invest safely. It's simply how you are allocating your saving and the aggregate or the total investment in any given period of time is by definition equal to the total amount of saving.

PAUL SOLMAN: Well, but you can understand then why people would conflate the two and say, "Oh well, savings and investment - it's the same amount, so it's the same thing." But...

ZVI BODIE: Well, I think what causes the confusion is that you're using the word "safe" and you have things like savings accounts. So, in the popular parlance, as opposed to the economics definitions, it is the case that saving is what you put into a savings account."

Bodie goes further and actually plays the role of an interviewer:
"At an annual meeting of economists, Paul and Zvi asked several professors of economics about the SEC's explanations of saving and investing, as taught on the SEC's Web site. The overwhelming response: The explanations are wrong."

BTW the video gives you an idea of the exciting surroundings at most Finance/Econ conferences.

Banks raising new capital for differing reasons

Seems like everyone os selling these days! Selling new shares that is. From raising money because of the stress test to raising money to repay TARP funds,

From the WSJ Banks Rush to Raise Capital:

"Wells Fargo and Morgan Stanley were among the first banks on Thursday to rush to raise capital following preliminary statements by the Federal Reserve. Wells Fargo said it would offer $6 billion in stock, while Morgan Stanley said it intends to sell $2 billion.

And then to repay TARP funds:
Three Banks to Sell Stock to Repay TARP Funds - DealBook Blog -
"The decision to sell new stock to help buy back government’s preferred shares and warrants shows that just a few months after last fall’s credit-market meltdown, some banks are feeling increasingly confident of their ability to stand on their own.

Other banks, including JPMorgan Chase and Goldman Sachs, have already declared their intention to buy back the government’s stake as soon as possible.

Funds allocated under the Troubled Asset Relief Program were meant to stabilize the banking industry after last fall’s turmoil, but they came with strings attached. Banks in the program face limits on executive compensation, as well as increased scrutiny of their practices, both by lawmakers and the public."

Saturday, May 09, 2009

So many interesting reads, so little time

In the spirit of the old FinanceProfessor Newsletter, here is how I am going to try and catch up:

Over at ClusterStock/BusinessInsider Joesph Weisenthal was really on a roll this week. The first article is an excellent fast look at why the Federal Government should not be active bank shareholders:
"The real question should be: Does the US having an active stake in Citigroup make it more likely that the bank will be run better for shareholders? If it does then okay, we can debate. But this seems highly unlikely, given how politicized lending can become. This is the same problem as having labor union representation on a board. The board's duty is not too look out for their sponsoring shareholders, their duty is to look out for all shareholders. But any government rep -- armed with mandates, such as "green" lending, lending to labor union-dominated companies and providing more affordable housing loans -- would have a totally separate agenda."

Weisenthal also reminds us that Fannie Mae and Freddie Mac are losing e money ($400 B to date) faster than AIG and GM combined but we hardly hear anything. He opines:
"But the news of the quarterly loss is getting hardly any attention....The problem is that the Fannie and Freddie disasters don't fit into any conventional media narrative....Fannie Mae? They help nice families get into homes. Their motto is something about helping the people who help house America. Who could be against that? Plus, the Fannie and Freddy story doesn't help explain the idea that laissez-faire deregulation is what allowed Wall Street to go crazy. Fannie and Freddy had their own freakin' regulator...."

And one more from ClusterStock. John Carney points out that a staggering 60% of subprime mortgage defaults, STARTED out as prime mortgages.
"...Mike Rotny takes a look at a recent study by the Boston Fed that devastates the subprime villain mythology. It turns out that roughly 28 percent of all mortgages defaults, and 60 percent of all subprime defaults, were mortgages that started with a prime mortgage.

"...28% of all mortgage foreclosures, and 60% of subprime foreclosures, are from people who started with a prime mortgage. Those are the Us — good credit scores, 20% down, pay the bills on time. . . .

In one we alluded to in class this week Henry Rearden probably turned in his fictional grave as 1.5 million Verizon subscribers will have to switch to AT&T as their regions (mainly rural) were sold to alleviate monopoly concerns.

"Yesterday AT&T announced that it has reached an agreement with Verizon Wireless that will see AT&T acquiring a large number of former Alltel Wireless assets and 1.5 million subscribers from Verizon for US$2.35 billion in cash. Verizon Wireless was required to divest of most of these particular markets in order to get federal approval for its acquisition of Alltel. The government required Verizon to release these Alltel markets in order to maintain competition."

Some of my favorite books ever are alternative histories. You know, the what would have happened if Day 2 of Gettysburg hadn't happened etc. In that spirit, "Big Jake" writing for Seeking Alpha has a great piece. It is just possible enough to be believeable, but just far fetched enough to be still be fiction. Definitely worth the time of reading the whole thing! The Worst Case Scenario (Someone has to say it) : (one look in at #4)
"As the government sends out additional “rebate” checks and takes ever-more drastic measures to force banks to lend, hyperinflation could take hold. However, comprehensive debt relief via a devaluation of the dollar is even more likely. This would entail the government issuing one “new” dollar for some greater number of “old” dollars—thus reducing both debts and savings simultaneously....

As there are many more debtors than savers in the U.S., the vast majority would support devaluation. The Chinese and other foreign holders of our bonds would be screaming mad, but unable to do anything"

Friday, May 08, 2009

SSRN-Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates by Eugene Fama, Kenneth French

Ok, for starters It was from Fama and French. So even if I said nothing more, you would probably assume it was good. Like most of their work, this one is thought-provoking and insightful. Their interest this time is in Mutual Fund performance.

Their findings? More evidence that markets are tough to beat.

SSRN-Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates by Eugene Fama, Kenneth French:

From the abstract:

"Bootstrap simulations produce no evidence that any managers have enough skill to cover the costs they impose on investors. If we add back costs, there is some evidence of inferior and superior performance (non-zero true alpha) in the extreme tails of the cross section of mutual fund alpha estimates. The evidence for performance is, however, weak, especially for successful funds, and we cannot reject the hypothesis that no fund managers have skill that enhances expected returns."

A look-in:
"The VW portfolio of funds that invest primarily in U.S. equities is close to the market portfolio, and
estimated before costs, its α relative to common benchmarks is close to zero. Since the VW portfolio of funds
produces α close to zero in gross (pre-cost) returns, α estimated on net (post-cost) returns to investors is
negative by about the amount of costs. And since mutual funds in aggregate produce α close to zero before
costs, equilibrium accounting allows us to infer that in aggregate other active managers do the same.

This latter parts rests on the assumption that if mutual fund performance was negative, "other" active managers would be beating the market. (it should be noted that this is not evidence that others do not beat the market, only that if they do, those gains on average must come from a group other than mutual fund managers.)

Of course this is just an aggregate test. The next step is to look to see whether individual fund managers beat the market:

"The aggregate results imply that if there are mutual funds with positive true α, they are balanced by
funds with negative α. We test for the existence of such funds. The challenge is to distinguish skill from luck.
Given the multitude of funds, many have extreme returns by chance. A common approach to this problem is
to test for persistence in fund returns, that is, whether past winners continue to produce high returns and losers
continue to underperform (for example, Grinblatt and Titman 1992, Carhart 1997)

.....We take a different tack. We use long histories of individual fund returns and bootstrap simulations of
return histories to infer the existence of superior and inferior managers. We compare the actual cross-section
of fund α estimates to the results from 10,000 bootstrap simulations of the cross-section.

The findings? From the conclusion:
For funds on average and the average dollar invested in funds underperform three-factor and four-factor benchmarks by about the amount of costs (fees and expenses). Thus, if there are fund managers with skill that enhances expected returns relative to passive benchmarks, they are offset by managers whose stock picks lower expected returns. We attempt to identify the presence of skill via bootstrap simulations. The tests for net returns say that even in the extreme right tails of the cross-sections of three-factor and four-factor t(α) estimates, there is no evidence of fund managers with skill sufficient to cover costs

Good stuff as always....

Cite: Fama, Eugene F. and French, Kenneth R.,Luck versus Skill in the Cross Section of Mutual Fund Alpha Estimates(March 9, 2009). Tuck School of Business Working Paper No. 2009-56. Available at SSRN:

Stress Tests Results Split Financial Landscape -

Stress Tests Results Split Financial Landscape -
"Broadly speaking, the test results suggested that the banking industry was in better shape than many had feared. Of the nation’s 19 largest banks, which sit atop two-thirds of all deposits, regulators gave nine a clean bill of health. The remaining 10 were ordered to raise a combined $75 billion in equity capital as a buffer against potential losses should the economy deteriorate. That amount is far less than many had forecast."

Thursday, May 07, 2009

SSRN-A Model of Casino Gambling by Nicholas Barberis

GREAT STUFF!!! Barberis uses prospect theory to help explain behavior at casinos.

SSRN-A Model of Casino Gambling by Nicholas Barberis:

From the abstract:
"...prospect theory can offer a surprisingly rich theory of gambling, one that captures many features of actual gambling behavior. First, we demonstrate that, for a wide range of parameter values, a prospect theory agent would be willing to gamble in a casino, even if the casino only offers bets with zero or negative expected value. Second, we show that prospect theory predicts a plausible time inconsistency: at the moment he enters a casino, a prospect theory agent
plans to follow one particular gambling strategy; but after he enters, he wants to switch to a different strategy. The model therefore predicts heterogeneity in gambling behavior: how a gambler behaves depends on whether he is aware of the time-inconsistency; and, if he is aware of it, on whether he is able to commit, in advance, to his initial plan of action."
One look in (which alone is worth the price of admission!):
"What is the intuition for why, in spite of loss aversion, a prospect theory agent might
still be willing to enter a casino? Consider a casino that offers only zero expected value bets
– specifically, 50:50 bets to win or lose some fixed amount $h – and suppose that the agent
makes decisions by maximizing the cumulative prospect theory utility of his accumulated
winnings or losses at the moment he leaves the casino. We show that, if the agent enters
the casino, his preferred plan is to gamble as long as possible if he is winning, but to stop
gambling and leave the casino if he starts accumulating losses. An important property of this
plan is that, even though the casino offers only 50:50 bets, the distribution of the agent’s
perceived overall casino winnings becomes positively skewed: by stopping once he starts
accumulating losses, the agent limits his downside; and by continuing to gamble when he is
winning, he retains substantial upside."

I would HIGHLY recommend downloading the whole thing if you have ever wondered why people go to casinos (as I have!)

Barberis, Nicholas,A Model of Casino Gambling(May 3, 2009). Available at SSRN:

Geithner: How We Tested the Big Banks - DealBook Blog -

A quick look from Geither's perspective at the stress tests (no not the results, just why, and what next.)

Geithner: How We Tested the Big Banks - DealBook Blog -
"We brought together bank supervisors to undertake an exceptional assessment of the strength of our nation’s 19 largest banks. The object was to estimate potential future losses, and ensure that banks had enough capital to keep lending even in the face of a deeper recession.

Some might argue that this testing was overly punitive, while others might claim it could understate the potential need for additional capital. The test designed by the Federal Reserve and the supervisors sought to strike the right balance....

The effect of this capital assessment will be to help replace uncertainty with transparency. It will provide greater clarity about the resources major banks have to absorb future losses.."

G.M. Posts a Quarterly Loss of $6 Billion -

While the accounting loss was lower, the rate at which GM was using cash is still amazingly fast.

G.M. Posts a Quarterly Loss of $6 Billion - "
"G.M. said it depleted $10.2 billion from its cash reserves in the quarter, or $113 million a day,"
Do you remember this post from last quarter when the firm lost $9 billion?

Well we can redo it now. I will base it off cash since I no longer trust accounting numbers. So based off of use of cash and assuming the quarter was based on January-March (I did not look since size is so large it really does not matter if I am off a day or two), the break down:

Per Day: $113.3 million
Per Hour: $4.72 million
Per Minute: $78,704
Per Second: $1,312

and remember that was AFTER any money came in!

To put in perspective, since I started writing this, if they are still hemorrhaging cash at the same rate, they have bled about $400,000. I better stop now!

NHL, Team in Bankruptcy Showdown -

Another sports story with finance ties, or a finance story with sports ties, you decide:

The case centers on Jim Balsillie (he of Blackberry fame) wanting to buy the team and move it to Southern Ontario. But to do this he has to 1. buy the team 2. get the league to approve 3. get out of Dodge (or Phoenix in this case).

To that end, he has made an offer that is contingent on being allowed to move the team. This got sudden urgency this week as the owner of the team he is trying to move, the Phoenix Coyotes, is in bankruptcy.

From the WSJ: NHL, Team in Bankruptcy Showdown -
"... lawyers for the NHL and one of its 30 teams, the Phoenix Coyotes, will face off in U.S. Bankruptcy Court in Phoenix two days after the franchise's parent company...filed for protection under Chapter 11 of the U.S. Bankruptcy Code. The filing came after months of speculation that the team's owner, trucking magnate Jerry Moyes, was running out of cash to cover ongoing losses that, according to court documents, totaled nearly $30 million last year. Mr. Moyes owns Swift Transportation Co. and is coping with a severe downturn in the U.S. shipping industry a year and a half after taking on $2.5 billion in debt to take the company he founded private....

The Coyotes have a 30-year lease at the arena that calls for a $700 million termination fee. Given that, the only way for Mr. Balsillie to take over the team and move it was for Coyotes Holdings to file for bankruptcy, which nullifies all ongoing contracts, including leases."

As a Sabres fan, this also hits to home as the potential owner (Jim Balsillie) wants to move the team close to Buffalo (Southern Ontario). Which will likely hurt the Sabres as well as the Toronto Maple Leafs. From the Buffalo News:
"Buffalo Sabres minority owner Larry Quinn … who said 20 percent of the Sabres' revenues come from southern Ontario …."Obviously, the southern Ontario market is part of our [area of dominant influence]. It's very important to our fans. It's something we have the right to promote and market as only the Buffalo Sabres'. If we were to sell our team by promising somebody the rights in another market, we wouldn't be able to do that, so I'm assuming that other people in the league will follow those same rules.
Stay tuned.

Wednesday, May 06, 2009

Madoff's former secretary reveals financier's private side | Business |

No real finance content but interesting background:

Madoff's former secretary reveals financier's private side | Business |
"In an interview with NBC television today, Squillari, who used to sit just yards from Madoff's office, said she believed the 71-year-old was withholding information from the authorities in order to protect accomplices: "I believe that yes, he is protecting people the weeks running up to his arrest in December, Madoff began obsessively taking his blood pressure every 15 minutes and would lie on the floor with his arms outstretched, complaining of back problems. Squillari told bemused colleagues, 'He seems to be in a coma.'

On the evening of 10 December, just hours after confessing to his two sons that his business was fraudulent, Madoff turned up to a staff Christmas party with his wife, Ruth, looking calm and exchanging stories about their grandchildren with friends.

'You wouldn't have thought they had a care in the world,' says Squillari"

Financial turmoil in the cycling world!

WOW! Ok, so I am very biased on this. I get about 40 tweets a day from Team Astana members. So when there is talk that the Giro may be the team's the last race, I get scared.

Boulder Report » Blog Archive » Giro d’Italia 2009: Is This Team Astana’s Last Race?:
"...In the original Vinokourov deal, seven co-sponsors collaborated to support Astana, named for the country’s capital. The sponsors paid regular installments to the federation, which then bankrolled the team....

Membership, of course, has responsibilities along with privileges, including the posting of a guarantee of 25 percent of rider and staff salaries (or 975,000 Swiss francs, whichever is larger) to an escrow account held by the UCI, and annual audits by Ernst and Young, the UCI’s independent accounting firm. In the event that a team’s riders go unpaid for a certain amount of time, the escrow account can be tapped to cover the shortfall. But the UCI also reserves the right to suspend or withdraw racing licenses for such financial difficulties.

And that appears to be precisely what is happening.

According to, only three of the eight original sponsors have paid....The reasons are not firmly known but, it’s assumed that the financial crisis and, particularly, the collapse in commodities prices in late 2008 are partly to blame. Kazakhstan is a resource-intensive economy and many of the sponsors rely on revenues from oil, natural gas and mining, three sectors that were hit with incredible speed and ferocity by the recession....According to sources within the federation, reported that the UCI has already drawn Astana’s $2 million bank guarantee reserve down to nothing."

Now what? The article (which while great for the biking crowd may a bit much for those looking for finance, suggests that if the funding collapses, look for Lance to lead a group of investors to launch their own team. (Maybe Nike?). But regardless, it would APPEAR the team would be allowed to bring the big names to the Tour. Stay tuned.

UPDATE 5/7/2009: Lance complains about lack of transparency and brief discussion of what LiveStrong can and can not do. From ESPN.

A look at Executive Compensation

This semester we really had to rush through executive compensation (market conditions took up quite a bit of class time), so I want to make my classes (and by extension others) aware of some of the debate on CEO pay. So a special post on CEO pay.

First yes CEO pay is high and getting higher over time. But I really do not want to address that to much bust to say that the level of pay appears to be closely tied to firm size and I will ignore level of pay since I am not sure it matters as much as the popular press claims. For a nice review try Jensen, Murphy, and Wruck 2004 or this by BusinessKnowhow 2007.

An important paper that I do want to point out is from Jared Harris that suggests that despite of good intentions (I will give boards the benefit of the doubt), that stock options might actually make agency costs worst:
"At best, incentive compensation has an ambiguous relationship with firm performance that can reward executives for luck (Bertrand & Mullainathan, 2001), or encourage CEOs to manage their personal reputations rather than their organizations (March, 1984). Research indicates that current forms of managerial incentive pay do not effectively align the incentives of managers and shareholders; indeed, a number of studies have had difficulty showing any positive link between executive incentive pay and improved performance of the firm (e.g., Mishra, McConaughy, & Gobeli, 2000; Murphy, 1999), and some work suggests that high CEO incentive pay or perquisites may in fact decrease firm performance (Blasi & Kruse, 2003; Core, Holthausen, & Larcker, 1999; Yermack, 2006).

As a corollary to these troubling results about the disconnect between incentive pay and firm performance, it also appears that incentive alignment does little to alleviate concerns about malfeasance and self-dealing. While incentive pay is traditionally seen as an alternative to monitoring as a way to prevent managerial misconduct (Tosi, Katz, & Gomez-Mejia, 1997; Zajac & Westphal, 1994), empirical results do little to confirm the claim that malfeasance is reduced. Indeed, recent research (Harris & Bromiley, 2007) investigates whether large potential payoffs for managers – contrary to classically formulated incentive theory – do not supply an adequate incentive for the good management practices that scholars typically suppose, but rather provide an enticement to cheat, commit fraud, or otherwise cook the books in an attempt to fabricate the levels of corporate performance that will trigger the payoff."
Supposing for a moment that CEO pay is a problem for more than just jealousy reasons, what can be done? It appears that regulation and increased transparency may not work as well as more active shareholders. Two papers to back this claim.

First that active institutional shareholders do keep pay LEVELS lower. From 2003.
"Hartzell and Starks find that as institutional ownership goes up, the
firm is more likely to use pay for performance plans. Additionally, the
level of CEO pay tends to go down. These findings suggest that
institutional investors make better monitors than ordinary investors do.
Possibly more convincing however, (since it solves the endogenity
problem which is that is the institutional investors may select which
stocks that pay for performance and pay managers less) is their analysis
that finds as managerial ownership goes up, pay goes down relative to
control groups in the periods that follow."
and then the article suggesting regulation and transparency do not lower pay levels

SSRN-How Much Sunlight Does it Take to Disinfect a Boardroom? A Short History of Executive Compensation Regulation by Ian Dew-Becker:
"This paper reviews the history of executive compensation disclosure and other government policies affecting CEO pay, and as well surveys the literature on the effects of these policies. Disclosure has increased nearly uniformly since 1933. A number of other regulations, including special taxes on CEO pay and rules regarding votes on some pay packages have also been introduced, particularly in the last 20 years. However, there is little solid evidence that any of these policies have had any substantial impact on pay. Policy changes have likely helped drive the move towards more use of stock options, but there is no conclusive evidence on how policy has otherwise affected the level or composition of pay"

Tuesday, May 05, 2009

Hedge Fund Manager Strikes Back at Obama - DealBook Blog -

Wow. Hard hitting letter by Clifford S. Asness of AQR Capital Management opposing Obama's comments attacking hedge funds in the wake of the Chrysler bankruptcy. Much good. My favorite part:

Hedge Fund Manager Strikes Back at Obama - DealBook Blog -
" is the job and obligation of all investment managers, including hedge fund managers, to get their clients the most return they can. They are allowed to be charitable with their own money... but if they give away their clients’ money to share in the “sacrifice”, they are stealing....That’s how the system works"

Warren Buffett Answers Your Questions - DealBook Blog -

From the NY Times:

Warren Buffett Answers Your Questions - DealBook Blog -
"“For most newspapers in the United States, we would not buy them at any price,” said Mr. Buffett, whose company owns a large stake in The Washington Post Company. He added that he sees the possibility of “nearly unending losses” for newspaper companies. Mr. Munger called the industry’s decline “a national tragedy” and said that “what replaces it will not be as desirable as what we are losing.”"

I agree there is something very relaxing about reading a paper, but for speed, ease, and capacity, the web is #1 for a reason.

Monday, May 04, 2009

Swine flu meet Money and Banking

Predicting Flu With the Aid of (George) Washington -
"The best way to track the spread of swine flu across the United States in the coming weeks may be to imagine it riding a dollar bill."
The model is based on the "Where’s George?" that you probably have seen stamped on dollar bills. It "
was started more than 10 years ago by Hank Eskin, a programmer who marked each dollar bill he received with a note asking its next owner to enter its serial number and a ZIP code into the Web site, just for the fun of seeing how far and fast bills traveled. By 2006, the site had the histories of 100 million bills."
Great use of the data! Hope it is right. It predicts a fairly slow spread.

Interestingly the virus can live on money for 10 days, so be sure to wash hands after touching money! (Which is what I tell cashiers at the Park and Shop all the time!)

Weekly Wisdom Roundup #26 (Links You Don’t Want To Miss) | Simoleon Sense

Weekly Wisdom Roundup #26 (Links You Don’t Want To Miss) | Simoleon Sense:

ALWAYS a weekly read! Good stuff.
"Simoleon Sense presents business issues through an interdisciplinary lens, integrating research on:

* Value Investing
* Behavioral Finance
* Neuroeconomics
* Psychology
* Economics
* Venture Capital & Private Equity"

Bill Hammond's presentation to my classes

Bill Hammond spoke to my class last week on careers in insurance and risk management. It was very good. If you only want audio of it, that is available here. If you want to see the powerpoint slides, they are available here.

Watch Bill Hammond's presentation at SBU School of Business in Educational & How-To | View More Free Videos Online at

Jack Kemp in His Own Words -

As a former Buffalo Bills' QB, Jack Kemp was in the news locally all the time. He was a great guy and the country is poorer for his passing this weekend.

The many WSJ op-ed pieces he wrote stand as a testament to his intelligence and economics.

Jack Kemp in His Own Words -
"Congressman Jack Kemp died Saturday at age 73. The following are excerpts from his many op-eds for The Wall Street Journal:

[one of his last ones]

In my opinion, people of all colors and income levels don't hate the rich. They want to get rich. They're more interested in generating wealth than they are in redistributing wealth. They want to own property, educate their children and build a nest egg that can be passed on to their heirs. Unfortunately, some aren't able to access the same ladder of opportunity that is so readily available to the majority. . . .

By giving people access to capital and allowing them to take ownership of assets, entrepreneurship will be encouraged and the cycle of poverty can begin to be broken. All persons should have the opportunity to go as high as their merit and determination can carry them."

Sunday, May 03, 2009

Will time-tested 'Sell in May' stocks strategy work in this recession? - Salt Lake Tribune

Will time-tested 'Sell in May' stocks strategy work in this recession? - Salt Lake Tribune:
"A time-tested strategy that calls for investors to 'sell in May and go away' might sound awfully tempting this year.

...Simplistic as it sounds, the approach has produced reliable results with reduced risk for decades. Since 1950, the Dow Jones industrial average has produced an average gain of 7.3 percent from November through April versus a scant 0.1 percent from May through October."
I have to admit that calendar anomalies always annoy me. They have to be mere random coincidences, right? They make no sense given everyone has a calendar and are therefore predictable. Thus, even if they were found through rigorous data mining to exist, they should instantly go away as soon as announced.

And yet they seemingly continue to exist. Indeed there is an academic controversy on this. To wit, in 2001 Jaceobsen and Bouman document the anomaly internationally:
"The 'Sell in May' effect tends to be particularly strong in European countries and is robust over time. Sample evidence, for instance, shows that in the UK the effect has been noticeable since 1694. While we have examined a number of possible explanations, none of these appears to convincingly explain the puzzle. "
But then in 2004, I thought had been Maberly and Piercet explained it away using dummy variables for outliers (LTCM and October 1987), but then again in 2005 Jacobsen, Mamun, and Visaltanachoti examine it (this time looking at individual stocks as opposed to indicies) and found it still lived on:
"We study the interaction between this anomaly - known as the Halloween effect - and the January effect and other well-known anomalous findings on portfolios formed on Size, Dividend Yield, Book to Market ratios, Earnings Price ratios and Cash Flow Price ratios in equally but also value weighted portfolios for the US market. Our main findings are that contrary to the January effect, the Halloween effect seems a market wide phenomenon unrelated to these well-known anomalies. All portfolios in our study show higher average winter returns than summer returns. In most portfolios this difference is statistically and economically significant."

Saturday, May 02, 2009

Southwest Airlines and hedging from WSJ

Article -
"Southwest Airlines Corp. (LUV), the airline industry's most aggressive fuel hedger, remains committed to hedging to lock in future fuel prices, Laura Wright, chief financial officer, told Dow Jones Newswires.

Amid today's volatile oil prices, Southwest has placed new hedges this year using only call options. 'That's our favorite way to hedge,' she said, because it offers protection against rising prices, but allows the company to pay market rates if prices remain low.

'We used call options a lot in the late 1990s, but then they got too expensive' as oil prices rose, Wright said. 'In the last two years, we used a lot more collars,' which combine options contracts, providing protection from falling prices but less upside protection if prices rise. 'We've always used simple methods of hedging, a combination of options, collars and swaps,' she said."

Just this past week a group in my MBA class did a case on Southwest's hedging, so for all of you in class, this should be nothing but review!

Buffett Dismisses Stress Tests for Assessing Banks (Update1) -

Buffett Dismisses Stress Tests for Assessing Banks (Update1) -
"Berkshire Hathaway Inc. Chairman Warren Buffett dismissed the importance of the government’s stress tests of major U.S. financial institutions in helping him assess banks he invested in.

“I think I know their future, frankly, better than somebody that comes in to take a look,” Buffett said before the start of Omaha, Nebraska-based Berkshire’s annual shareholder meeting today. “They may be using more of a checklist type approach.”"
True, UNLESS, they get better information (as in non public information).

Friday, May 01, 2009

Stock Repurchases: Theory and Evidence by Jim Hsieh, Qinghai Wang

SSRN-Stock Repurchases: Theory and Evidence by Jim Hsieh, Qinghai Wang:

From the abstract:
"...article surveys the theoretical and empirical studies on share repurchases. Share repurchases have surpassed cash dividends and become the dominant form of corporate payouts since the last decade. This study provides a brief description of five major types of share repurchases and considers the motives that influence firms’ repurchase decisions. Specifically, we examine regulatory and tax considerations, agency costs of free cash flows, signaling and undervaluation, capital structure, takeover deterrence, and employee stock options. The review indicates that the existing literature provides ample support for several of these motivations while others merit further investigation."
and a fast look-in from the paper:
"Firms can buy back their shares through five different mechanisms: (1) fixed-price tender offers, (2) Dutch-auction tender offers, (3) open-market share repurchases, (4) transferable put-rights distributions, and (5) targeted stock repurchases."

Cite: Hsieh, Jim and Wang, Qinghai,Stock Repurchases: Theory and Evidence(April 2009). Available at SSRN:

This one will fit perfectly into any corporate finance class! It will be required reading for next semester in my classes.

Why Bankruptcy is needed (from the WSJ)

Obama did a good impersonation of Mr. Thompson or Wesley Mouch as he harped against bond investors and hedge fund managers (the industrialists from Atlas Shrugged), but such political name calling is not what is needed and indeed quite scary. (why scary? He is essentially asking the funds to forgo returns they deserve to pick an alternative that makes them worse off. This is not a recipe for success.)

Chrysler Goes to Court -
"'I don't stand with those who held out when everyone else is making sacrifices,' Mr. Obama nonetheless declared, blaming what he called 'a small group of speculators' for the car maker's Chapter 11 filing."
The WSJ points out that this political/populist view is exactly why bankruptcy is needed:
"President Obama's broadside against bankers yesterday illustrates better than any argument ever could that bankruptcy court, and not the political arena, is where Chrysler belongs. Yesterday's filing isn't the end of the U.S. auto industry, or even necessarily of Chrysler, and it offers the best chance to protect all parties under the rule of law"